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Abnormal Returns, Risk, and Options in Large Data Sets

Author

Listed:
  • Silvia Caserta

    (Erasmus University Rotterdam)

  • Jon Danielsson

    (London School of Economics and University of Iceland)

  • Casper G. de Vries

    (Erasmus University Rotterdam)

Abstract

Large data sets in finance with millions of observations have becomewidely available. Such data sets enable the construction of reliablesemi-parametric estimates of the risk associated with extreme pricemovements. Our approach is based on semi-parametric statisticalextreme value analysis, and compares favourably with the conventionalfinance normal distribution based approach. It is shown that theefficiency of the estimator of the extreme returns may benefit fromhigh frequency data. Empirical tail shapes are calculated for theGerman Mark-US Dollar foreign exchange rate, and we use the semi-parametric tail estimates in combination with the empiricaldistribution function to evaluate the returns on exotic options.

Suggested Citation

  • Silvia Caserta & Jon Danielsson & Casper G. de Vries, 1998. "Abnormal Returns, Risk, and Options in Large Data Sets," Tinbergen Institute Discussion Papers 98-107/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:19980107
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    File URL: https://papers.tinbergen.nl/98107.pdf
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    References listed on IDEAS

    as
    1. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Byström, Hans, 2003. "Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis," Working Papers 2003:1, Lund University, Department of Economics.
    2. Danielsson, Jon, 2002. "The emperor has no clothes: Limits to risk modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1273-1296, July.

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